On June 23, 2014, the U.S. Supreme Court handed down the first decision to place limitations on the U.S. Environmental Protection Agency's (EPA) authority to regulate greenhouse gases (GHG) under the Clean Air Act. In the Massachusetts v. EPA decision in 2007, the Court found that GHG emissions could be considered air pollutants under the Clean Air Act. However, in this week's Utility Air Regulatory Group v. Environmental Protection Agency (UARG) holding the majority clarified that although GHG could be considered air pollutants under the Act generally, they are not necessarily pollutants throughout the Act regardless of statutory context.

This decision largely validates the EPA's 2011 regulations requiring large sources seeking preconstruction or operating permits (under the PSD or Title V programs) to evaluate and assess controls for GHG emissions. However, it invalidates EPA's attempt to rewrite the GHG emission level triggers for permitting of sources that do not already require PSD or Title V permits. According to the agency, it will still be able to regulate 83% of the targeted emissions instead of the 86% under the original regulation. Read a summary of the Court's decision by the FaegreBD appellate advocacy team here.

The impact of the UARG decision on pending power plant rules under Section 111 of the Clean Air Act is still unclear. Although the majority noted that this case does not address EPA's Section 111 authority, in his dissent, Justice Breyer's contended that the majority decision "drains the Act of its flexibility and chips away" at the Massachusetts decision. This could indicate that the majority of the Court would take a narrow view of EPA's asserted authority to regulate carbon dioxide in other programs under the Act.

No PSD or Title V Permits Solely for Greenhouse Gases

In Part I of the UARG ruling, the Court held that the Clean Air Act neither requires nor allows EPA to apply the permitting requirements of PSD or Title V solely for GHG. This case, it noted, involved "an agency laying claim to extravagant statutory power over the national economy while at the same time strenuously asserting that the authority claimed would render the statute unrecognizable to the Congress that designed it." The Court first drew a distinction between the definitions of an "air pollutant" in the specific permitting provisions of the Clean Air Act versus the general broad definition of an "air pollutant" as used across the entire Clean Air Act. The Court reasoned that the broad definition, which was at issue in the Massachusetts case, is all-encompassing and allowed the agency to decide to regulate GHG emissions. However, the Court pointed out that the definition used in the operative permitting provisions of the Clean Air Act has routinely been narrowed by EPA over the years, and therefore cannot be construed to require permits solely for GHG emissions absent Congressional action.

The Tailoring Rule is Void

Part I of the opinion also voids what's known as the Tailoring Rule – EPA's previous attempt to use its discretion to "tailor" GHG emission thresholds to fit the PSD and Title V permitting programs. The Clean Air Act by statute set the permitting thresholds at 100 and 250 tons per year for pollutants. If companies with GHG emissions in these ranges were required to obtain permits, EPA (and states with delegated programs) would be required to permit thousands of new GHG-emitting entities such as office buildings, apartment buildings and churches. Therefore, by regulation, EPA "tailored" a rule that changed the statutory triggers for GHG permitting to 100,000 tons per year. In UARG, the Court struck down this rule as an impermissible expansion of EPA's power. It held that "EPA's interpretation is unreasonable because it would bring about an enormous and transformative expansion in EPA's regulatory authority without clear congressional authorization." The Court focused on the statute's clear thresholds and chastised the agency for its efforts to rewrite the statute, holding that it was "patently unreasonable – not to say outrageous – for EPA to insist on seizing expansive power that it admits the statute is not designed to grant."

Control Technology for Greenhouse Gases Allowed for Permitted Facilities

In Part II of the opinion, the Court held that if a source is already required to comply with the PSD program for other pollutants, then it can be required to comply with BACT requirements for GHG. The Court held that GHG can be subject to BACT because "[t]here is no indication that the Act elsewhere uses, or that EPA has interpreted ‘each pollutant subject to regulation under this chapter' to mean anything other than what it says." Therefore, because GHGs are subject to regulation, per the Massachusetts opinion, they can be subject to BACT (once PSD permitting is triggered by other pollutants). In making this conclusion, the Court assumes BACT requirements can be sensibly applied without a dramatic expansion of EPA's authority. The Court specifically states, "We acknowledge the potential for greenhouse-gas BACT to lead to an unreasonable and unanticipated degree of regulation, and our decision should not be taken as an endorsement of all aspects of EPA's current approach, nor as a free rein for any future regulatory application of BACT in this distinct context."

In allowing EPA to impose GHG BACT on sources already requiring PSD permits, the Court expressed several limiting factors. First, it noted that BACT is based on control technology at a source and cannot be used to require a fundamental redesign of a facility. Second, the Court quotes from an EPA guidance document that states "BACT may not be used to require reductions in a facility's demand for energy from the electric grid." Finally, the Court affirmed that EPA can set de minimis thresholds for imposing GHG BACT, but it must justify the decision.

Implications for Pending Power Plant GHG Rules

Even though it affirmed EPA's authority to require large sources to include carbon dioxide in their permitting processes, the Court in the majority opinion went to great lengths to chastise the agency for overreaching its authority by seeking to require permits solely for GHG. While the majority noted in a footnote that this decision does not impact the authority for the New Source Performance Standards (NSPS) program under Clean Air Act § 111, there are inferences in this case that the Court will be leery of EPA expanding its GHG authority. The Court called EPA out for "unreasonable interpretations" of the statute and stated that it cannot reinterpret the Act for its own regulatory purposes. It accused EPA of trying to lay "claim to extravagant statutory power over the national economy" without authority. This suggests that EPA must shore up the statutory basis for its proposed power plant regulations under the NSPS program.

Interestingly, since the Massachusetts decision EPA has repeatedly claimed that the decision required the regulation of GHG. In the UARG decision, the Court went out of its way to state that the requirement does not apply to all programs in the statute. The Massachusetts decision "is not a command to regulate, but a description of the universe of substances EPA may consider regulating."

In describing what EPA may require as BACT, the Court described a limited approach, nothing as broad and far reaching as EPA is considering in the NSPS. The "outside of the fence line" requirements such as demand use reductions by third parties and mandating certain power sources suggested in the recently proposed power plant rule could be the type of expansion of EPA authority that the Court warns against.

What Does This Mean?

• If you are a large source with PSD permitting obligations for other pollutants, you will probably need to include GHG limits in your permits.

• If you are not required to comply with the PSD or Title V permitting regimes you have no new requirements for carbon dioxide.

• The EPA will need to review the legal justifications for the proposed adoption of the Power Plant GHG rules under the NSPS program in light of the Court's admonitions against the agency expanding its authority.

• The lower courts will view this case with a critical eye going forward as the first limitation on EPA's greenhouse authority since the Massachusetts decision.

• EPA and states will have to determine how to deal with removing the regulatory provisions requiring Title V or PSD permitting based solely on GHGs that are currently included in state implementation plans.

• If you have already obtained a Title V or PSD permit based solely on GHGs, the basis for that permit has been voided as a matter of federal law. However, state laws must be considered as well. Specific next steps to "undo" permits previously authorized by the now-invalidated Tailoring Rule are not yet understood.

Please contact Andrew Wheeler or Olivia Lucas if you have questions about how this ruling may affect your business.